Nachshon Draiman

Special investigation

 

Yehuda "Jay" Draiman was the subject of a special investigation conducted by the Illinois Legislative Investigating Commission for the Illinois General Assembly (see:4/22/75 Illinois Nursing Homes: A Report to the Illinois General Assembly). Yehuda was barred from serving in the nursing home field after he defrauded a resident under his care of more than $40,000. The report cites testimony from a resident stating that Yehuda offered to return her money if she took a ride with him to his "bank", and instead left her stranded in a deserted cornfield in the dead of winder in 8 degree weather. Only by luck was she spotted by a passerby who reported the incident to the Mchenry County Sheriff's Department. When the sheriff's office interviewed Yehuda, he claimed when they got out into the country she asked to be let out. He let her out and drove back to Chicago and found her purse in the back seat. In these instances, as well as the recent litigation, Yehuda Jay Draiman's tactic has been to invent illegalities to accuse his victims of, in order to shift the focus of attention away from him.

Document.

Fiduciary duty, consumer fraud and deceptive trade practices and conspiracy

 

Yehuda "Jay" Draiman was found guilty of breaches of fiduciary duty, consumer fraud and deceptive trade practices and conspiracy, and a judgment in excess of $1.5 million was entered against him, in addition to several findings of contempt, by the Cook County Circuit Court & upheld by the Appellate court (ruling 1-03-0857).

Document.

Judge Doyle Opinion

 

United States Bankruptcy Court
Northern District of Illinois
Eastern Division
Transmittal Sheet for Opinions
Will this opinion be published? NO
Bankruptcy Caption: In Re: Yehuda Draiman
Bankruptcy No.: 05 B 54315
Adversary Caption: Multiut Corporation v. Yehuda J. Draiman; Adv. No. 06 A 00476
Nachshon Draiman v. Yehuda J. Draiman; Adv. No. 06 A 00477
Adversary No.:
Date of Issuance: June 22, 2006
Judge: Carol A. Doyle
Appearance of Counsel:
Attorney for Movant or Plaintiff: Greenberg Traurig;
Alan J. Mandel, Ltd.
Attorney for Respondent or Defendant:
Trustee or Other Attorneys: Lehman & Fox; Mandell, Menkes & Surdyk, LLC
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In Re: ) Chapter 7

MEMORANDUM OPINION
Multiut Corporation (“Multiut”) and Nachshon Draiman (“Nachshon”) moved for
summary judgment on their adversary complaints (Nos. 06-476 and 06-477) against the debtor,
Yehuda Draiman (“Yehuda”). Multiut seeks a determination that certain debts of Yehuda are
nondischargeable under 11 U.S.C. § 523(a)(2), (4) and (6). There is a long history of litigation
between Multiut and Yehuda, his wife Miriam Draiman (“Miriam”), and various corporations
owned or used by Miriam and Yehuda. Three judgments have been entered against Yehuda and
these corporations, one in a state court proceeding and two in involuntary bankruptcy
proceedings filed separately against Multiut and Nachshon, Yehuda’s brother.
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Multiut seeks summary judgment on the dischargeability counts (Counts I through IV) of
its adversary complaint based primarily on principles of res judicata and collateral estoppel.
Nachshon also seeks summary judgment on the dischargeability count (Count I) of its complaint.
For the reasons discussed below, Multiut is entitled to judgment as a matter of law that the
$1,252,046 state court judgment against Yehuda is nondischargeable pursuant to § 523(a)(6)
under the doctrine of collateral estoppel because the state court made final determinations of
factual issues that are dispositive of this claim. Multiut and Nachshon have also demonstrated
that they are entitled to summary judgment holding Yehuda liable for the judgment entered
against him in the involuntary bankruptcy proceedings. Therefore, Multiut’s motion is granted
in part and denied in part, and Nachshon’s motion is granted.
I. Background and Facts
This action is one battle in a long and bitter war between two brothers, Yehuda Draiman
and Nachshon Draiman. Nachshon owns Multiut, a company founded in the 1980’s after the
deregulation of the energy industry. Multiut negotiates contracts with gas and electricity
suppliers and provides gas and electrical auditing and consulting services to its customers.
Yehuda also began working for Multiut in 1989 and became an IMA. In 2000, the relationship
between the brothers broke down when Nachshon learned that Yehuda had told many Multiut
customers that companies formed by Yehuda and Miriam were affiliated with Multiut and that
Yehuda was in effect stealing customers and even diverting payments due to Multiut to a newly
renamed corporation owned by Miriam, Multiut Electric.
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In 2001, Multiut filed suit in the Circuit Court of Cook County against Yehuda and the
five companies used by Yehuda: U.S. Gas & Energy Corp. (“USG&E”), U.S. Utilities
Corporation (“Utilities”), U.S. Gas, Electric and Telecommunications, Inc. (“USGET”), M.
Draiman Corporation (“MDC”), and Multiut Electric, Inc. (“Multiut Electric”). Miriam was the
sole shareholder of USG&E, USGET, MDC, and Multiut Electric. Multiut later amended the
complaint to add Miriam as a defendant. On January 17, 2003, after a long bench trial, the state
court entered judgment against Yehuda, Miriam, and the corporations on various counts,
including breach of fiduciary duty, breach of contract, violation of the Uniform Deceptive Trade
Practices Act, and tortious interference with prospective business relationships. The court also
found Miriam liable for conspiring with Yehuda to breach his fiduciary duty to and employment
contract with Multiut. The court entered judgment against Yehuda for $250,000 in
compensatory damage, $250,000 in punitive damages, and later for $1,002,046 in attorneys fees
(collectively the “State Court Judgment”). The Illinois Appellate Court affirmed the State Court
Judgment, and the Illinois Supreme Court denied Yehuda and Miriam’s petition for leave to
appeal the Appellate Court’s decision.
Yehuda launched a new offensive against Nachshon in March 2004, when he and two of
Miriam’s corporations (MDC and USG&E) filed involuntary petitions for relief under Chapter 7
of the Bankruptcy Code against Multiut and Nachshon. The cases were dismissed almost
immediately. The Bankruptcy Court awarded $400,000 in compensatory damages, $25,000 in
attorneys’ fees, and $450,000 in punitive damages against Yehuda and the two corporations in
Multiut’s case (the “Multiut Involuntary Judgment”). The Bankruptcy Court also awarded
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$25,000 in attorneys’ fees and another $450,000 in punitive damages against Yehuda and the
two corporations in Nachshon’s case (the “Nachshon Involuntary Judgment”).
Yehuda filed his Chapter 7 bankruptcy case on October 14, 2005. Multiut and Nachshon
filed separate adversary proceedings against him. Multiut’s adversary complaint seeks a
determination that the State Court Judgment and the Multiut Involuntary Judgment are
nondischargeable debts pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and (6). Multiut also filed
several objections to Yehuda’s discharge pursuant to 11 U.S.C. § 727. Multiut’s motion requests
summary judgment only with respect to Counts I through IV regarding the dischargeability
under § 523 of the State Court Judgment and Multiut Involuntary Judgment. Likewise,
Nachshon’s adversary proceeding seeks a determination that the Nachshon Involuntary
Judgment is a nondischargeable debt pursuant to 11 U.S.C. § 523(a)(6). Nachshon also filed
several objections to Yehuda’s discharge pursuant to 11 U.S.C. § 727. Nachshon’s motion
requests summary judgment only with respect to Count I regarding the dischargeability of the
Nachshon Involuntary Judgment.
In Count I, Multiut alleges that the State Court Judgment is nondischargeable under
§ 523(a)(2)(A) of the Bankruptcy Code as a debt incurred as a result of false pretenses, false
representations, or actual fraud. Count II alleges that the State Court Judgment is
nondischargeable under § 523(a)(4) because Yehuda knowingly embezzled from Multiut by
misappropriating checks and accounts receivable and depositing them into an account he
established for one of his alter ego corporations. Count III alleges that the State Court Judgment
is nondischargeable under § 523(a)(6) because essentially all of the conduct for which he was
held liable was willful and malicious. Count IV alleges that the Multiut Involuntary Judgment is
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nondischargeable under § 523(a)(6) because Yehuda filed the involuntary petition to cause
willful and malicious injury to Multiut. Count I of Nachshon’s complaint alleges that the
Nachshon Involuntary Judgment is nondischargeable under § 523(a)(6) for the same reasons.
II. Res Judicata and Collateral Estoppel
Multiut and Nachshon argue that principles of res judicata and collateral estoppel render
the State Court Judgment and their respective Involuntary Judgments nondischargeable as a
matter of law. They contend that the state court and the bankruptcy court have already made
binding determinations of all the factual and legal issues raised in the dischargeability counts.
Res judicata is sometimes used loosely to include the doctrines of res judicata and
collateral estoppel. Both doctrines prevent parties from relitigating factual and legal issues that
have previously been litigated. Both require a prior final judgment on the merits. Both require
identical parties or a close relationship between parties in the prior case and the current case.
However, the scope of the bar against relitigation differs. Res judicata, used in its strict sense,
bars all causes of action that a prior court decided, merging them into the judgment and
foreclosing further dispute. See Rivet v. Regions Bank, 522 U.S. 470, 474 (1998); Smith Trust
& Sav. Bank v. Young, 312 Ill. App. 3d 853, 855 (2000). It is often referred to as “claim
preclusion,” because it bars relitigation of entire causes of action or claims, as opposed to
individual legal or factual issues. It also bars causes of action not decided if the parties should
have raised the claims in the prior lawsuit. Rivens, 522 U.S. at 474. “[T]he claim extinguished
includes all rights of the plaintiff to remedies against the defendant with respect to all or any part
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of the transaction, or series of connected transactions, out of which the action arose.”
Restatement (Second) of Judgments § 24 (1982).
Res judicata generally does not apply to dischargeability actions under § 523 of the
Bankruptcy Code. Brown v. Felsen, 442 U.S. 127, 138 (1979). Section 523 sets forth many
bases for finding debts nondischargeable, each with its own elements of proof. Schwager v.
Fallas (In re Schwager), 121 F.3d 177, 187 (5th Cir. 1997). The issue of dischargeability does
not arise until a debtor files for bankruptcy, so no dischargeability “claim” could have been
adjudicated or extinguished in a previous lawsuit in which judgment was entered before the
debtor filed her petition. In this case, the State Court Judgment and the Involuntary Judgments
were entered against Yehuda and the other defendants before he filed his petition in this case.
The dischargeability claims did not exist when the judgments were entered, so they could not
have been resolved by the previous courts. Therefore, res judicata does not provide a basis for
granting summary judgment against Yehuda.
Unlike res judicata, collateral estoppel often applies in § 523 actions. Grogan v. Garner,
498 U.S. 279, 285 (1991). Collateral estoppel, or issue preclusion, “refers to the effect of a
judgment in foreclosing litigation in a subsequent action of an issue of law or fact that has been
actually litigated and decided.” Meyer v. Rigdon, 36 F.3d 1375, 1378 n.1 (7th Cir. 1994).
Although bankruptcy courts often have exclusive jurisdiction to determine the dischargeability
of debts, parties may not relitigate factual or legal issues resolved in an earlier litigation that
were necessary to the judgment entered. Collateral estoppel forecloses relitigation of legal and
factual issues even if they arise in a new legal claim in the second case. “The whole premise of
collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no
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further factfinding function to be performed.” Parkland Hosiery Co. v. Shore, 439 U.S. 322, 336
n.23 (1979). Therefore, when a previous judgment against a debtor resolved a specific factual or
legal issue that is later raised in a dischargeability action under § 523, collateral estoppel may
apply to bar relitigation of that issue. Grogan, 498 U.S. at 289–91; Montana v. United States,
440 U.S. 147, 153 (1979). Federal courts give collateral estoppel effect to state judgments based
on the collateral estoppel rules that apply in the state court that entered the judgment. 28 U.S.C.
§ 1738; A.D. Broker v. Mercer, 305 F.3d 660, 669 (7th Cir. 2002).
Under Illinois law, collateral estoppel applies when four requirements are satisfied:
(1) the issue decided in the prior litigation was identical to the current one;
(2) there was a final judgment on the merits;
(3) the party against whom estoppel is asserted was a party to the prior action or in
privity with it; and
(4) the factual issue at stake has actually and necessarily been litigated and determined in
the prior action.
LaSalle Bank Nat’l Ass’n v. Vill. of Bull Valley, 355 Ill. App. 3d 629, 635 (2005). Courts
applying collateral estoppel must carefully review the prior judgment to determine whether the
factual or legal issue at issue in the later proceeding was in dispute and finally resolved in the
earlier proceeding.
III. Summary Judgment Standards
Multiut’s motion for summary judgment asserts that the courts entering the State Court
Judgment and the Multiut Involuntary Judgment have already decided all the issues relevant to
each of their dischargeability actions in Counts I through IV. Nachshon’s motion makes the
same argument with respect to Count I. Both parties contend that, under the doctrine of
collateral estoppel, Yehuda may not relitigate these issues and that they are entitled to judgment
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as a matter of law based on the findings in the previous cases. Yehuda’s responses to the
motions say essentially that he contests the findings made by the previous courts, and that he
should be allowed to take discovery to prove that the state court’s findings were not correct.
On a motion for summary judgment, the moving party “has the burden of showing the
absence of a genuine issue of material fact.” Pommier v. Peoples Bank Marycrest, 967 F.2d
1115, 1118 (7th Cir. 1992). The court should not weigh evidence, make credibility
determinations, or attempt to determine the truth of the matter. Instead, the court must
“determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 250 (1986); see Lohorn v. Michal, 913 F.2d 327, 331 (7th Cir. 1990). The court may
consider “any material that would be admissible or usable at trial.” Woods v. City of Chi., 224
F.3d 979, 987–88 (7th Cir. 2000). The court views the facts in a light most favorable to the
nonmoving party and allows that party the benefit of all reasonable inferences. Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Schneiker v. Fortis Ins. Co., 200
F.3d 1055, 1057 (7th Cir. 2000).
When a party seeks summary judgment based on the doctrine of collateral estoppel, the
nonmoving party may not defeat the motion simply by establishing that it has evidence that
conflicts with the factual conclusions of the trier of fact in the previous case. Even if the
nonmoving party produces evidence that contradicts a prior judgment, collateral estoppel bars
the party from relitigating facts decided in the previous case. Prochotsky v. Baker & McKenzie,
966 F.2d 333, 334 (7th Cir. 1992); Boim v. Quranic Literary Inst., 340 F. Supp. 2d 885, 900
(N.D. Ill. 2004). The moving party bears the burden to show that collateral estoppel applies in
the first instance. The nonmoving party may oppose the motion by arguing that the moving
9
party has not met all elements of collateral estoppel. But if collateral estoppel does apply, it
forecloses litigation of issues that the prior court actually and necessarily decided. Havoco v.
Freeman, Atkins & Coleman, Ltd., 58 F.3d 303, 307–08 (1995).
IV. Count IV: § 523(a)(6) Willful and Malicious Injury—State Court Judgment
In Count IV of the complaint, Multiut alleges that the State Court Judgment against
Yehuda is nondischargeable under § 523(a)(6). It contends that the state court actually and
necessarily decided that Yehuda intentionally misappropriated Multiut receivables and usurped
the business of Multiut to Yehuda’s alter ego corporations.
In its motion for summary judgment, Multiut argues that the State Court Judgment
resolved all the issues relevant to its § 523(a)(6) count. Section 523(a)(6) provides that a debt is
not dischargeable if it involved (1) willful and malicious injury, (2) by the debtor, (3) to the
property of another entity. 11 U.S.C. § 523(a)(6) (2000 & Supp. IV 2005). For collateral
estoppel to apply, the court must conclude that (1) the state court case involved the same parties
or their privies, (2) there was a final judgment on the merits, (3) the same issues were presented
to the state court, and (4) the state court actually and necessarily decided the issues. Here, there
is no question regarding the first two elements. First, the state court litigation involved the same
parties or their privies. Yehuda was a defendant in the state court litigation and participated in
the trial. Second, the state court entered a final judgment on the merits after trial, which was
affirmed on appeal. The court must therefore examine the state court proceedings to determine
whether the state court actually and necessarily decided each element of Multiut’s § 523(a)(6)
claim.
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A. Willful and Malicious Injury
The first element of § 523(a)(6) is that the debt must arise from a willful and malicious
injury. Kawaahau v. Geiger, 523 U.S. 57, 61–62 (1998). To prove that an injury was willful for
purposes of § 523(a)(6), the plaintiff must show that the defendant intended not only the act
resulting in harm, but also intended the harm. Id. at 61. Because § 523(a)(6) covers intentional
torts, the basic principle of tort law known as “substantial certainty” suffices to show intent,
Under that rule, an actor presumptively intends not only the initial conduct but all substantially
certain results. Id.
To prove that an injury was malicious, the plaintiff must show that it was “wrongful and
without just cause or excuse even in the absence of personal hatred, spite or ill will.” The
previous court need not have used the word “malicious” for collateral estoppel to apply. See
Condict v. Condict (In re Condict), 71 B.R. 485, 488 (N.D. Ill. 1987) (denying discharge for
“willfull, wanton, vexatious, and contemptuous conduct” on the basis of collateral estoppel, even
though prior court never used the term “malicious”).
To determine whether collateral estoppel bars litigation of whether Yehuda caused a
willful and malicious injury to Multiut, the court must examine the details of the state court
proceeding. Multiut initially sued Yehuda, USG&E, Utilities, USGET, MDC and Multiut
Electric in the Circuit Court of Cook County. The court found that Yehuda was an employee of
Multiut who entered into competition with his employer, and then caused Multiut’s customers to
believe that Multiut Electric and USG&E were part of or affiliated with Multiut. It held Yehuda
liable for breach of fiduciary duty to Multiut and breach of his contract with Multiut. The trial
court specifically found that Yehuda “violated his fiduciary obligation as a key employee by
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competing on his own and through various alter ego identities; breached his contract of
employment, and used the trade secrets of [Multiut]; to wit, his customer lists, knowledge of
terms with each customer and business plans and materials, down to the direct copying of
[Multiut’s] customer agreement for use by Utilities, for his own benefit.” (Pl. Stmt. Ex. B, Op.
at 11.)
The court further found that, by usurping Multiut’s business opportunities and deceiving
many of Multiut’s customers, he “positioned himself to enter into competition with, and then
actually entered into competition with, his then employer, Multiut,” by creating a business for
electrical auditing and the exploitation of power purchase options (“PPOs”) through Multiut
Electric and USGET. He accomplished this by “usurpation of [Multiut’s] business opportunities
and through deceiving numbers of Multiut’s customers.” He also competed with Multiut’s gas
supply business through Utilities, a “means used by Yehuda Draiman to violate his obligation to
his employer.” (Pl. Stmt. Ex. B, Op. at 11.)
The court further found that Yehuda violated the Illinois Uniform Deceptive Trade
Practices Act, 815 ILCS 510/1 et seq., by “fully intending” to create confusion and in fact
confusing Multiut’s customers. The court also concluded that Yehuda tortiously interfered with
Multiut’s prospective business relationships by usurping Multiut’s business plan, subverting a
relationship he had developed on Multiut’s behalf to create an electric energy business, and
causing Multiut’s customers to believe they were dealing with Multiut when they were really
dealing with the defendant corporations that were not affiliated with Multiut. (Pl. Stmt. Ex. B,
Op. at 14.)
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The court held Yehuda directly liable for his breach of fiduciary duty and breach of his
employment contract. It also found that Yehuda was the alter ego of all five corporate
defendants and therefore personally liable for damages caused by them. (Pl. Stmt. Ex. B, Op. at
10.) The court awarded damages against Yehuda in the amount of $250,000 in compensatory
damages on the counts of breach of fiduciary duty, the Illinois Trade Secrets Act, and breach of
contract. It concluded that these damages were sufficient to compensate Multiut for the damages
caused with respect all the counts on which it found for Multiut. The court also awarded Multiut
$250,000 in punitive damages against Yehuda.
Thus, the Illinois courts have conclusively determined that Yehuda “knowingly
perpetrat[ed] a scheme of identities,” “positioned himself to enter into competition with, and
then actually entered into competition with, his then employer, Multiut,” with an intent that
“became clear” when he instructed and assisted Miriam to rename one of his alter ego
corporations. Further, the court awarded punitive damages specifically because it found that
Yehuda’s conduct was “purposeful and intentional.” Accordingly, the Illinois courts have
actually and necessarily decided the facts necessary to establish that Yehuda had the requisite
intent under § 523(a)(6). He fully intended to cause harm through competition, or at the very
least, such harm was substantially certain to result.
Based on the same factual findings, the court also concludes that Yehuda’s conduct was
malicious because it was wrongful and without cause. See Barclays Am./Bus. Credit, Inc. v.
Long (In re Long), 774 F.2d 875, 881 (8th Cir. 1985). Indeed, the court reasoned that regardless
of Yehuda’s subjective “feelings of disappointment, or even his belief that Nachshon had
breached a promise to him[,] does not legally justify the path of self-help that he evidently
13
elected to follow.” (Pl. Stmt. Ex. B, Op. at 12.) Thus, collateral estoppel applies to establish the
first element of § 523(a)(6).
B. By the Debtor
The prior judgments also establish the second element of § 523(a)(6), that the injury was
“by the debtor.” Yehuda was held directly liable on all counts. Further, Yehuda’s use of alter
ego corporations establishes as a matter of law that any acts by the corporations and his acts
were one and the same. Alter ego allows a court to impose personal liability on any entity—a
parent corporation, a shareholder, a director or officer, or as here, a legally uninvolved third
party—which “uses a corporation merely as an instrumentality to conduct that person’s or
entity’s personal business.” In re Rehab. of Centaur Ins. Co., 238 Ill. App. 3d 292, 296 (1992).
The court found that Yehuda used these corporations “interchangeably, at his convenience.” (Pl.
Stmt. Ex. B, Op. at 10.) Acts of the corporations are thus legally attributable to Yehuda, so
injuries they caused are attributable to Yehuda as well. Therefore, collateral estoppel applies
with respect to the second element of § 523(a)(6).
C. To the Property of Another Entity
Under § 523(a)(6), the willful and malicious injury must be to the property of another.
“Property” includes both tangible and intangible property. BPS Guard Servs. v. Myrick (In re
Myrick), 172 B.R. 633, 637 (Bankr. D. Neb. 1994) (holding that damages for intentional
interference with business relations and misappropriation of goodwill would be
nondischargeable if plaintiff proved malice). The state court assessed consequential damages
14
against Yehuda in two components: (1) payments to Utilities derived from a customer Multiut
originally contracted with; and (2) electric auditing and PPO business from customers Multiut
previously billed, collected from and distributed to. These damages fall within the broad
definition of “property” under § 523(a)(6). Therefore, collateral estoppel applies to the third
element of § 523(a)(6).
Having determined that Yehuda willfully and maliciously caused injury to Multiut’s
property, the court must decide which components of the judgment are nondischargeable. The
general rule is that the nature of the act determines dischargeability. “All liabilities resulting
[from a willful and malicious act] are nondischargeable.” Britton v. Price (In re Britton), 950
F.2d 602, 606 (9th Cir. 1991) (holding actual and punitive damages for willful and malicious act
nondischargeable). Therefore, the entire judgment, punitive damages, and award of attorneys’
fees are all nondischargeable as a matter of law.
V. Involuntary Judgments—§ 523(a)(6)
Multiut and Nachshon also seek summary judgment on Counts IV and Count I of their
complaints respectively. Both counts ask the court to determine that judgments against Yehuda
and two of his alter ego corporations (MDC and USG&E), the three petitioning creditors in the
involuntary petitions filed against Multiut and Nachshon, are nondischargeable under §
523(a)(6). The Multiut Involuntary Judgment awards $400,000 in compensatory damages,
$25,000 in attorneys’ fees, and $450,000 in punitive damages. The Nachshon Involuntary
Judgment awards $25,000 in attorney’s fees and $450,000 in punitive damages.
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To prevail on these counts, Multiut and Nachshon must demonstrate that the filing of the
involuntary petitions falls with the § 523(a)(6) exception to discharge for willful and malicious
injury. Once again, the prior proceedings establish all elements of the claims. First, the court’s
award of punitive damages shows that Yehuda actually and necessarily possessed the requisite
intent under § 523(a)(6). Indeed, after a consolidated trial on Multiut and Nachshon’s motions
for punitive damages, the bankruptcy court concluded that Yehuda filed the involuntary petitions
“on purpose to harm without cause. . . . [The petition] was dismissed almost immediately upon
the motion being made .” (Pl. Stmt. Ex. L, Tr. at 21.) The court emphasized that it was the
“intention[al nature of the filing] which allows [Multiut] to have the punitive damages. [Yehuda]
well knew he . . . should not” file under the circumstances. (Id. at 24.) The court continued:
“This is shocking. . . . We don’t get [cases like this]. This is the first one in 20 years that I can
recall . . . .” (Id. at 25.) These conclusions show that Yehuda acted willfully and maliciously as
a matter of law.
Second, the injury was necessarily “by the debtor” because Yehuda was one of the
petitioning creditors. Third, Yehuda took purposeful steps to alert vendors, suppliers, and other
business associates that Multiut was in bankruptcy. (Pl. Stmt. Ex. M, Tr. at 8–12.) These acts
caused injury to Multiut and Nachshon’s property because that term includes intangibles such as
goodwill. Myrick, 172 B.R. at 637. Collateral estoppel therefore prevents Yehuda from
contesting any element of the claims under § 523(a)(6). With no genuine issues of material fact
for trial, the court will grant summary judgment on these counts in both adversary proceedings.
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VI. Other Counts
In Count I, Multiut also argues that the State Court Judgment against Yehuda is
nondischargeable based on the fraud exception in 11 U.S.C. § 523(a)(2)(A). Section
523(a)(2)(A) provides that debts are not dischargeable if they are for money obtained by “false
pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or
an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A). The Seventh Circuit has adopted a
single test to prove all three types of fraudulent conduct. The creditor must show that—
(1) the debtor obtained funds through false pretenses or representations which the debtor
knew to be false or made with such reckless disregard for the truth as to constitute
willful misrepresentation;
(2) the debtor possessed the intent to deceive; and
(3) the creditor justifiably relied on the misrepresentation to its detriment.
Mayer v. Spanel Int’l, Ltd. (In re Mayer), 51 F.3d 670, 674–76 (7th Cir. 1995).
In this case, while Yehuda undoubtedly engaged in various types of fraudulent conduct,
the specific findings in the State Court Judgment do not fit neatly into the requirements of
§ 523(a)(2)(A). For example, it requires the creditor to justifiably rely on the misrepresentations.
Here, Yehuda often induced third parties to makes checks payable to or otherwise conduct
business with entities he controlled, so the party who relied on his misrepresentations was
someone other than Multiut. While some of Yehuda’s actions consisted of misleading Multiut’s
own employees into depositing checks into accounts of his alter ego corporations, there is no
need to determine which part of the damages assessed against Yehuda fit within § 523(a)(2)(A)
because the court has already concluded that the entire State Court Judgment is nondischargeable
under § 523(a)(6).
1
Although Yehuda breached his fiduciary duty, and his acts may constitute “defalcation
while acting in a fiduciary capacity,” Multiut has not sought to recover under this aspect of §
523(a)(4), so the court will not address it.
17
In Count II of the complaint, Multiut alleges that the State Court Judgment is
nondischargeable under § 523(a)(4) as “embezzlement.” However, under the
nondischargeability statute, embezzlement means “the fraudulent appropriation of property by a
person to whom such property has been entrusted or into whose hands it has lawfully come.” In
re Weber, 892 F.2d 534, 538 (7th Cir. 1989). Embezzlement is essentially a form of theft
(larceny). The two differ only in that an embezzler acquires the property lawfully while a thief
acquires the property unlawfully (such as by false pretenses).
The facts as found in the state court do not all fit within this definition. Essentially,
Yehuda Draiman persuaded customers to begin paying a corporation he set up to siphon business
away from Multiut. In so doing, he breached his fiduciary duty as employee and insider.
Multiut quotes findings of fact in the opinion illustrating that Yehuda directed Multiut personnel
to deposit checks payable to Multiut into the account of Multiut Electric, a company Yehuda set
up as part of the scheme to divert business from Multiut. However, Yehuda himself never
lawfully possessed the funds. In addition, the state court assessed damages for Multiut’s loss of
business revenue, and for electric auditing and PPO business Yehuda contracted for while in
Multiut’s employ. (Pl. Stmt. Ex. B, Op. at 12.) Thus, the debt is not necessarily “for”
embezzlement, as the statute requires. Because the court has already concluded that the entire
State Court Judgment is nondischargeable against Yehuda under § 523(a)(6), the court will not
further analyze this count to determine whether some portion of the State Court Judgment might
also be nondischargeable under § 523(a)(4).1
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VII. Conclusion
For all the reasons stated above, the court will grant summary judgment with respect to
Counts III in favor of Multiut, and will enter a judgment finding that the $1,502,046 State Court
Judgment entered against Yehuda is nondischargeable. The court will also grant summary
judgment with respect to Count IV in favor of Multiut, and with respect to Count I in favor of
Nachshon Draiman, and will enter a judgment finding that the $875,000 and $475,000 judgments
entered against Yehuda are nondischargeable. The court will deny the remainder of Multiut’s
motion for summary judgment.
Dated: June 22, 2006
_________________________________
CAROL A. DOYLE
United States Bankruptcy Judge

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